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Historically, (the end of the 80 with abolished foreign trade monopoly thru the first half of the 90) offshore companies were registered in the name of real owners, relatives, front parties, etc. The most commonly used scheme didnt seem sophisticated: Russian company is offshore holding. However, the fact of holding these shares (of foreign com panies) was a violation of the Russian Law. In a sense, the modern Russian law on affiliated entities (groups of entities) evolved mechanically from the simple schemes that used to be employed in the 90, which are practically outdated. The shares of many offshore compa nies were then transferred to non name trusts (the simplicity of this scheme was as sessed relatively later). The scheme is currently typical of a the overwhelming majority of large enterprises (groups). Such innovation in creating non transparent ownership structures and deriving tax free revenues from property is linked to a gradual recognition (by many Russian majority shareholders) of multiple advantages: tax benefits, political risk protection, inheritance security, manipulation (switch) with assets/blocks of shares for construction (reorganization) of their corporate groups, etc. According to the assessments available, it is non transparency of an offshore for law enforcement agencies of a non resident (i.e. insecure rating according to Financial Stability Forum) that is most impor tant criterion in selecting a jurisdiction.

Offshore companies (established both by Russian physical bodies and legal entities) were booming in the period between 1992 and 1995. Late in the 90, the number of Rus sian offshore companies in foreign countries accounted for tens of thousands (there is no exact data available). Nearly 2000 companies were established annually. Geography of foreign offshore companies used by Russian physical bodies and companies is quite am ple. There are countries that were preferred most. For example, as of 2002, 8% of GDP of Cyprus fell at offshore companies, including 60% ones of Russian origin. A total of over thousand offshore companies were incorporated in Cyprus at that period. From 18 to thousand companies (i.e. up to 40%) belonged to Russian residents, according to various assessments. Cyprus based offshore companies were widely used by stock market par ticipants, insurance and trade companies as well as for assets protection on the basis of sophisticated schemes. Many large Russian companies utilized offshore companies in corporated in Gibraltar, British Virgin Isles, holding companies at Denmark, Luxemburg, Netherlands, etc. There were several scandals associated with offshore companies estab A report of the RF Minister of Natural Resources Yu. Trutnev at the State Duma on February 11, 2005.

In this case, foreign (offshore) companies, groups, groups of entities (according to the terminology of the RF Ministry of Natural Resources) mean companies in which participation of Russian residents accounts for not less than 51%.

RUSSIAN ECONOMY in trends and outlooks lished for money laundry. The offshore mechanism is typical of the banking sector of Rus sia.

It is not for the first time that the issue of tightening the treatment of offshore compa nies has been brought up47. Attempts to interpret the real owner concept as applied to banks and amendments made to RF Law On Banks and Banking Business in terms of re stricting a share of offshore companies in authorized capital of Russian banks up to 10% (in 2003 thru 2004) are worth mentioning. At the beginning of 2005, the RF Ministry of Fi nance put forward an initiative (corresponding amendments were made to the RF Tax Code) n additional tax payments due by companies with offshore management (i.e. in cases when a group have a management company in offshore zones located in foreign countries). The latest innovations of the RF Ministry of Natural Resources will be indisputa bly positive from the point of view of making transparent the information on ownership structure and beneficiaries. However, both world and Russian practice shows that legal requirements alone will bring no positive general economic effect unless supported by confidential relations (this classic term of a new institutional theory is appropriate here as never before) and effective international cooperation.

4.2.3. International Expansion Boundaries There was another essential trend that emerged in regard to the YUKOS case:

boundaries of international expansion of Russian corporate groups were determined quite explicitly, especially those based on extracting industries of the economy. The divide line is most likely to be represented by trans or multinational nature of possible strategic inter national business alliances.

Drastically enhanced ownership driven expansion of the largest Russian groups in foreign countries, which is typical of the period of 2004 2005, has been faced no restric tive counter measures yet. As an example we refer to attempts made by a series of major oil companies in keeping industrial vertical fixed on the consumer (by purchasing oil re fineries and gas station chains in foreign countries, etc.): NORILSKY NICKEL in gold min ing, SEVERSTAL with Canadian Stelco and Italian Lucchini and other ferrous metallurgy companies, BAZOVY ELEMENT with aluminous production enterprises, SUAL with a variety of projects in non ferrous metallurgy, telecommunications and diamond production busi ness, etc.

In doing so, however, any options of including foreign companies into the list of prin cipal shareholders of the largest Russian extractive industry groups are subject to ap proval by the government. Recently, all major transactions related to purchase of Russian assets by foreign companies are subject to be submitted to the RF President for prelimi nary consideration (N BP in 2003, Silovye Mashiny and Siemens, LUKOIL and Conoco Phillips in 2004). Most likely such approval was also needed by ROSNEFT to obtain a loan from a syndicate of Chinese banks to the amount of $6 billion, which will be repaid by oil supplies to CNPC, Chinese oil company (48,4 million tons till 2010). According to the esti mates, this loan was obtained to effect settlements on YUGANSKNEFTEGAZ48, though ROSNEFT doesnt consider this transaction a loan and specifies that the funds are in Refer to, for example, : Apel ., Gunko V., Sokolov I. Cashing and Offshore Business in Schemes. St.Petersburg : PITER, 2002 ; Kabir L.S. Organizing Offshore Business. .: Finances and Statistics, 2002; Ushakov D.L. Offshre Zones in Practice of Russian Taxpayaers. .: Yurist, 1999; Radygin . Disclosing Information on Beneficiary Ownership // Records of an OECD round table on corporate management. Moscow.

October 2 thru 3, 2003.; Behind the Corporate Veil. Using corporate entities for illicit purposes. Paris: OECD, 2001.

Kommersant Publishing House (www.kommersant.ru). July 22, 2004.; Finansy. 2005. No. 5. P. 52.

Section 4.

Institutional and Macroeconomic Challenges tended to make investments in industrial and economic activity and implementation of capital intensive projects.

4.2.4. Revising Privatization Results The issue of revision of privatization results is the most important tool intended to ex ert psychological pressure upon large businesses. Though almost all senior government officials expressed, at least once, their non acceptance of such methods on a large scale basis, the true intentions of the government are represented by uncertainty in this field.

None of the relatively efficient solutions (public political decision on moratorium in revising privatization results; reduction in limitation periods; differentiation of possible approaches in revising transactions subject to a criminal component; adoption of clearly defined rules of nationalization, etc.) that were put forward in the period between 1999 and 2004, has been adopted.

A report made by the RF Accounting Chamber, Analysis of Public Property Privatiza tion in the Russian Federation Over the Period Between 1993 and 2003, which was drafted in 2004 and scheduled for discussion (after several delays) at the State Duma dur ing its spring session in 2005, received a wide discussion. It is our opinion that the report itself provides no innovations in regard to Russian privatization, which in neither event would have been analyzed by Russian and foreign experts in the 90 2000 (the literature contains thousands of articles and monographs on the subject). Tens, if not thousands, of evidences of nontransparent or questionable privatization transactions were reported by all Russian and regional mass media (in this case, it is not important whether these mate rials are invited or not). It is generally recognized that almost every privatization transaction performed within the 90 2000 might be impeached on the ground of at least formal (procedural) evidences. Furthermore, since its inception in 1995, the RF Accounting Chamber itself performed several audits on privatization both at separate enterprises and objects and particular industries and regions. As far as we know, its audit reports received no serious response (though quite unreasonably in several cases) until the mid 2000.

The authors of the report reasonably identified some adverse affects in the analysis of the three visible stages of Russian privatization: large scale privatization in the period between 1993 and 1994, monetary privatization in the period between 1994 and 1999, and current privatization, which started from the adoption of the Concept 1999 :

losses sustained from investment tenders ;

biased evaluation (including undervaluation) of privatized objects and blocks of shares;

assets are not classified into tangible and financial ones ;

intangible assets are not included into evaluation of enterprises ;

abuse of power by executive authorities in the process of privatization ;

illicit sales of objects which are not subject to privatization ;

dilution of public blocks of shares ;

lack of a procedure of termination and damage recovery in case of violation of invest ment terms and conditions by a purchaser, etc.

There are three issues to be underlined as disputable: first, negative impact of pri vatization on structural reconstruction and efficiency, investment attraction, competitive advantages and, in a general sense, real earnings growth (the latter is most questionable in the context of privatization alone); second, suspension of the State Duma from deci sion making on privatization (a well known problem related to the privatization forecast plan) at the monetary stage; third, share for loans auctions.

RUSSIAN ECONOMY in trends and outlooks It is impossible to make unambiguous conclusions in the fist case (which is also evi denced by a series of empirical studies of interaction between privatization and efficiency that were conducted in the 2000). It is our opinion that in the second case the government reasonably avoided cooperation with the State Duma for the benefit of further privatization, however, this problem was eliminated by a new law on privatization adopted in 2002. The case of share for loans auctions is more complicated. In spite of the fact that formal judi cial structure of share for loans auctions managed to withstand numerous court proceed ings, their odium and non transparency are generally recognized. Therefore, public (not legal ones) claims can be laid to the actual creators of the regulatory and legal framework rather than its practical users.

The authors of the report emphasized that it is the legal problems that are responsi ble for most of the deficiencies related to Russian privatization. It is our opinion that both political context and system based corruption and employment of the notorious adminis trative mechanism in the process of privatization were poorly covered in the report49. Nev ertheless, the key conclusions of the RF Accounting Chamber are undisputable: Privatiza tion assisted in fulfilling the task aimed at changing the patterns of ownership: almost 60% of enterprises became private, new market institutions were established, namely joint stock companies, stock market, institutional investors system, commercial banks, insur ance companies, whereas privatization itself was accompanied by a minimum of social conflicts, many enterprises are currently efficient, the results of privatization of 1993 2003 must neither be abolished nor revised on the ground of imperfection and incom pleteness of the legislative base , it is useful to analyze the deficiencies of the previous stages of privatization in order to avoid mistakes in privatizing mineral resources, land, electric power industry and railroads in the future50.

Obviously, the RF Accounting Chamber is supposed to focus on the issues related to the looses sustained by the government during privatization, as it is mainly responsible for monitoring utilization of public funds and public property (however, it is supposed to do the same in analyzing utilization of budgetary funds, export of weapons, operation of public banks, etc., privatization is not the case here). In spite of that the RF Accounting Cham bers aggregate estimates of potential losses from privatization (nearly $45 billion over ten years) are quite conditional and adequately unjustifiable, there were identified the fields where regulation still remains the weakest. These are as follows:

law based settlement of issues related to restitution of governments rights as a public property owner (the relevant recommendation is not a novelty a Federal Law On the Procedure of Nationalization and Municipalization should be adopted)51 (foot note);

law based identification of the criteria of strategic enterprises involved in providing na tional security, as well as lack of mechanisms prohibiting or restricting foreign capital participation in privatization of strategic objects ;

in spite of adoption (with nearly 10 year delay) of Federal Law On Public and Municipal Unitary Enterprises, the existing institution of unitary enterprises remains inefficient ;

inefficient management of the blocks of shares held by the government ;

lack of both legal base for privatization of foreign property of the Russian Federation and control mechanisms over its current utilization by public agencies and other or ganizations.

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